After experiencing a record-breaking surge in April, the trading volume of GIFT Nifty derivative contracts has seen a significant decline in May. The popular contracts, traded on the NSE International Exchange at GIFT City in Gandhinagar, have witnessed a nearly 46 percent drop in turnover, falling from $82 billion in April to $44.24 billion in May.
Market analysts attribute this sharp decrease to various factors, including foreign investor behavior and market volatility, highlighting a shift in trading dynamics within the International Financial Services Centre (IFSC).
Foreign Investors Influence Market Trends
Market experts attribute the sharp decline to the activities of foreign investors. Overseas investors are primarily responsible for the volume in the International Financial Services Centre (IFSC).
Recent data indicates that Foreign Portfolio Investors (FPIs) have been net sellers of Indian shares worth approximately $2.7 billion as of May 24.
The selling pressure from FPIs in the domestic cash market is seen as a significant factor influencing the reduced turnover in GIFT Nifty contracts.
Impact of Election Uncertainty
Foreign investors have adopted a cautious approach in part due to the uncertainty surrounding election results. Most market experts believe that this wait-and-watch strategy has contributed to the lower volumes observed in GIFT Nifty contracts.
Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, highlighted that market sentiment is swinging between extreme pessimism and optimism, leading to significant volatility and cautious behavior from Foreign Institutional Investors (FIIs).
Historical Performance and Current Trends
Since the launch of GIFT Nifty contracts on July 3 last year, trading turnover on the NSE IX has been consistently rising. The current calendar year saw turnovers consistently exceeding $70 billion, reaching a record high of $82 billion in April.
From July to December 2023, GIFT Nifty’s turnover ranged between $58 billion and $65 billion, showcasing significant investor interest.
Factors Contributing to Volume Decline
Several factors may explain the decline in intraday volumes, according to Deepak Jasani, head of retail research at HDFC Securities.
These include reduced intraday trading by foreign and other participants, higher volatility in GIFT Nifty, and lower depth compared to the domestic Nifty.
Additionally, changes in the domestic Nifty contract size since late April have led to reduced contract value and some volume diversion from GIFT Nifty. The price difference between GIFT Nifty and domestic Nifty has also doubled, making GIFT Nifty comparatively more expensive.
Currency Considerations
Traders’ expectations of the rupee appreciating post-election results have further influenced market behavior.
Anticipating a stronger rupee, traders are reducing open positions in GIFT Nifty to avoid potential losses when converting dollar margins into rupees. This precaution is partly warranted, given the recent appreciation of the rupee against the dollar.
Domestic Cash and F&O Turnover Trends
Cash and derivative volumes in the Indian equity markets on both the BSE and NSE exchanges have remained stagnant for the fifth straight month since the start of 2024.
The combined F&O average daily turnover for both exchanges hit a six-month low of Rs 430 lakh crore in May, down 3.4 percent from the previous month. This marks the third consecutive month of declines.
Meanwhile, the combined average daily trading volume in the cash segment of both exchanges in May rose slightly by 1.8 percent to Rs 1.18 lakh crore from Rs 1.16 lakh crore in April.
Market Sentiments and Seasonal Factors
Alok Churiwala, Managing Director of Churiwala Securities, noted that May is traditionally a month where volumes are generally weaker due to summer holidays in India.
He also pointed out that the buoyancy and new heights scaled by the US markets over the last few weeks have contributed to the momentary waning interest in Indian indices. This phenomenon aligns with the old saying on Dalal Street: “Sell in May and go away.”
The recent trends in GIFT Nifty turnover reflect broader market sentiments and the cautious approach of investors amid uncertainty and volatility.
Investors and analysts alike will be closely monitoring the performance of the GIFT Nifty and other financial instruments as the market navigates these difficulties.
The Information is Collected from Money Control and MSN
